The can do just fine releasing a $500 console. As long as its BC with the PS4 and that MS doesnt release a $300 console.
The problem with the PS3 wasnt just that it cost more than the 360, it was also because it was seen as a $600 box while 360 was "starting at $299", and in addition sony was losobg almost $200+ from every console sold.
If the PS5 releases at $500 and the XB2 at $400 amd there is a noticeable difference in game performance, then the PS5 would still sell more. For most of this gen the XB1 has been cheaper than the PS4, but was still being outsold.